Libya's revolt scares oil traders

"Nothing explodes like an oil refinery and rioters tend to like to burn things," analyst says.

Italy has the most to lose from a revolution in Libya, because of its business ties with Muammar Gaddafi's government, according to one energy analyst [GALLO/GETTY]

As military jets pound protesters in the Libyan capital, oil analysts around the world are watching apprehensively from comfortable offices.

"The price for crude oil is up by five dollars per barrel, and most of the press is relating this rise to the tensions that are escalating as we speak," said Stephen Jones, the vice president of market services with Purvin & Gertz, an energy consultancy based in Houston, Texas.

“Unrest in the greater Middle East market-place is becoming a greater concern to global oil markets," Jones told Al Jazeera in a phone interview.

The price of Brent crude hit $105 per barrel on Monday, and pushed as high as $108 in after-hours trading, levels not seen since September 2008.

Libya, Africa's third largest oil producer, pumps out around 1.6 million barrels of oil per day, meeting almost two per cent of global demand.

Fuelling revolt

Wealth from light sweet crude has allowed Muammar Gaddafi, an autocrat described as a "mercurial and eccentric figure who suffers from severe phobias” by US diplomats in WikiLeaks documents, to hold power for more than 40 years.

While oil production has only dropped by 50,000 barrels per day, according to International Energy Agency reports, Gaddafi's luck seems to be running dry.

"When you are using military force against protests in your capital, it shows how far it has gone," said Peter Zeihan, vice president of analysis with Stratfor, a global intelligence company.

At least 61 people died in unrest on Monday, adding to several hundred who have been killed in recent protests. Two Libyan air force jets landed on the island of Malta on Monday night; their pilots claimed they defected after refusing to bomb anti-government protesters. Several Libyan diplomats have also defected, protesting attacks on demonstrators.

"Libya is a genuine revolution. The military is split," Zeihan told Al Jazeera in a phone interview. A recent uprising in Egypt did not qualify as a revolution, he said, because the military remained united and firmly in control.

Libyans may be excited about the prospects of change. But energy markets beg to differ. "In general, oil markets prefer stability and stability often comes with [various] modes of governance," said Jones, hinting that markets are not perturbed by dictatorships, so long as the pipelines keep gushing.

"The best case scenario, from the oil market’s stand point, would be for unrest to calm," Jones added. "That might be at odds with the populace." The analyst would not comment on what would happen to energy markets if unrest spread to Saudi Arabia, the world’s biggest oil producer.

Paul Horsnell, head of oil research at Barclays Capital, told the UK Telegraph newspaper that Libya's uprising is "potentially worse for oil than the Iran crisis in 1979".

For global energy markets, that assessment might be an exaggeration. Libya's main oil infrastructure is located in the desert, far from population centres facing violence, said Stratfor's Zeihan. While drilling platforms and other expensive extraction equipment seem safe, refineries and loading platforms could be damaged.

"Nothing explodes like an oil refinery and rioters tend to like to burn things," Zeihan said. “The country is self-sufficient in its refined goods, if its refineries remain intact.”

An Italian job

While Libya produces enough petroleum for domestic consumption, its former colonial master Italy is not so fortunate. "The Italians have the most to lose," Zeihan said. "They get about one third of their oil and 10-15 per cent of their natural gas from Libya." Italy has enough oil reserves for 90 days and gas for 30 days, a government source told Reuters on Tuesday.

Eni, Italy’s biggest oil company which is partially owned by the government, has pledged to invest up to $25bn in Libya. Eni’s share price fell 5.1 per cent on Monday, the biggest drop since July 2009.

"If I was Eni, I would be terrified right now," Zeihan said. "The Italians don’t have an energy policy; they have even less of an energy policy than the Americans."

Italy is Libya's biggest trading partner. About $17bn worth of goods and services were exchanged between the two countries in 2009.

If Gaddafi’s regime falls, it is unclear how a new government would approach relations with Italy, while it is unlikely any government would stop oil exports to Europe, Zeihan said.

"Whoever takes power, has an interest in producing oil and natural gas,” he said. If I was the Europeans, I would put together a nice little aid package, to see that the contracts move regardless of who comes to power. It is an opportunity for everyone who isn’t Italy."

International energy companies, including Eni, Shell, BP and Norway’s Statoil have repatriated some personnel from Libya, according to reports.

While analysts say that it is unlikely any new government would nationalise the energy industry, the behavior of specific tribes in Libya is harder to predict.

On Monday, the head of the Al Suwayya tribe in eastern Libya threatened to cut oil exports to western countries within 24 hours unless the authorities put an end to the "oppression of protesters".

While Libya doesn’t produce as much oil as other countries in the region “it is still a major producer," said the Texas-based analyst Stephen Jones. "The question is: How much of their production could be put at risk?"

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